Whats is stock correlation or similarity?

The similarity of assets, or correlation, is a statistical measure on how the two securities move in relation to each other. Correlation is computed into what is known as the correlation coefficient, which ranges between -1 and +1.

1 indicates a strong positive relationship between securities and implies that as one security moves, either up or down, the other security will move in lockstep in the same direction.

-1 indicates a strong negative relationship and implies that as one security moves, either up or down, the other security will move in locktep in the opposite direction.

A result of zero indicates no relationship at all.

How to calculate?

For calculating correlations between any two assets you can use the formula below:

Where:

is each x-value minus the mean of x (called “a” above)

is each y-value minus the mean of y (called “b” above)

For the easiest calculating asset of correlations, you can use our calculator.

Examples

Examples of Positive Correlations

The more time you spend running on a treadmill, the more calories you will burn.

Taller people have larger shoe sizes and shorter people have smaller shoe sizes

The longer someone invests, the more compound interest he will earn.

The longer amount of time you spend in the bath, the more wrinkly your skin becomes.

As it snows more, the sales for deicers go up.

As you drink more coffee, the number of hours you stay awake increases.

As a child grows, so does his clothing size.

As her salary increased, so did her spending.

Examples of Negative Correlation

A student who has many absences has a decrease in grades.

As weather gets colder, air conditioning costs decrease.

If a train increases speed, the length of time to get to the final point decreases.

As a bikers speed increases, his time to get to the finish line decreases.

As the slope of a hill increases, the amount of speed a walker reaches may decrease..

The more vitamins one takes, the less likely one is to have a deficiency.